Momentum Considerations for the XAU (Will Gann have the last laugh?)
The famous market technician W.D. Gann placed an emphasis on so-called "anniversary dates." He said to watch for these in the stock market, both for market indices as well as individual stocks. According to Gann, markets will sometimes turn on 1-year anniversary of previous turning points. For the XAU gold/silver index the 1-year anniversary of last year's Thanksgiving rally top is now here and the coming week is a portentous one for the gold stocks.
Is it possible we'll again see a repeat of last year's post-Thanksgiving gold stock decline into the New Year, or will does the XAU have sufficient momentum to continue on to higher highs as we head into the year-end historical "Santa rally" season? While one can "never say never" where the market is concerned, momentum factors are still in the XAU's favor as we head into December and I'm expecting a continued strong performance for the gold stock sector as we round out the current year.
The XAU index is in a better position right now as it is coming off a technically "oversold" position from the October correction, as reflected in its daily MACD indicator. Last year at this time the XAU had rallied steadily from its August 2004 low all the way to Thanksgiving of that year and the stress of this rally was beginning to show in the internal indicators (including MACD), some of which showed negative divergences compared to the price line. This time the XAU has had a couple of healthy corrective "pauses that refresh" along the way, including July and August and virtually the entire month of October as well as the early part of November.
At this time a year ago, the plurality between the number of gold stocks making 10-week new highs versus new lows was only positive four (4), with the 50 gold shares in my new highs/new lows index having last made 10-week new highs several days before Thanksgiving of 2004. This year's Thanksgiving week is different. As of last Friday's close (Nov. 25) the high/low plurality was a positive eight (8), with as many as many as 14 gold shares making new highs as recently as three days before Thanksgiving. This shows a vast improvement from the internal condition of the gold stock market a year ago. (Incidentally, the latest reading of golds making new 10-week highs included the following symbols: DEZ, FCX, GLG, IAG, IMPUY, KGC, NGX.TSX, PDL.TSX, PDG).
Another thing that shows an improvement right now over the year-ago period is the gold stock sector's number one leading indicator stock, Freeport Gold (FCX). Last Thanksgiving FCX had failed to make a new 10-week high and was below its previous high made in earlier October 2004. It was therefore lagging the XAU index heading into December last year - not a good sign.
This time around has been different in a positive way. FCX is coming off not only a fresh 10-week new high as of Friday, Nov. 25, but a new 52-week high as well. Rather than lagging the XAU as was the case at this time last year, FCX continues to lead.
What will be the key consideration to watch in the XAU index as we head into December and pass through this technically important 1-year anniversary date? I maintain most important key will be the 90-day moving average. Closing below this very important intermediate-term trend line would signal that an important top has very likely been made. It was, after all, the first close below the 90-day MA in early December 2004 following last year's Thanksgiving top in the XAU that signaled the gold stock sector had put in its interim top. It has also been the 90-day MA that we've followed productively since the rally began across the board earlier this year for gold shares, and it hasn't let us down so far. This trend line has acted as both a momentum and trend indicator so many times in the past for the leading gold shares that it's hard to ignore its signals.
Turning our attention to the silver shares, a couple of weeks ago I drew attention to the rally potential in leading silver producer Pan American Silver (PAAS, then $17.12) based on wave form analysis. PAAS has since rallied up to its most recent high of $19.29 as of Nov. 25. This would be a good time for traders who bought between $16.50-$17.00 when we originally reviewed PAAS earlier this month to take partial profits and raise mental stops. Does PAAS have further upside potential in the near-term? The chart suggests that PAAS could rally further in December, but how much further is open to question, so keep a close eye on PAAS in the days ahead. Forward momentum is still a positive factor for PAAS heading into December based on wave form considerations.